Conventional wisdom has it that the first generation acquires the wealth, the second enjoys it and the third loses it.
This is true in as many as nine out of ten families and has been the case throughout history, says Rodney Zeeb, co-founder and chief executive officer of The Heritage Institute and a man on a mission to change that statistic.
The goal of the Portland, Ore.-based institute is to teach wealthy families how to ensure the continued health of the family's finances and its unity through future generations. It is one of a number of firms that now offer wealth transfer consulting services designed to strengthen family relationships, pass on personal values and help heirs learn how to handle an inheritance.
Heritage grew out of a personal experience Zeeb had as an estate planning attorney: Soon after one of his clients died, one son's business fell into bankruptcy and the other son, who was Zeeb's friend, "drank himself to death." This changed Zeeb's perspective on his work.
"I didn't do all this planning just to end up killing my friend," Zeeb recalls thinking at the time. "What did I do wrong?'"
While working on a better plan for transferring wealth, Zeeb met Perry Cochell, who was researching the same issue. The two devised a program, then co-founded The Heritage Institute in 2003. They wrote a book about their research and their method called Beating the Midas Curse in 2005.
Zeeb says the reason most wealthy families wind up imploding has little to do with poor financial planning or recessionary economies. Instead, the family unit and its riches often disintegrate because heirs have not been prepared to deal with their inheritances and the emotional issues that accompany them.
The story of the Vanderbilts is a perfect example of what can happen. Cornelius Vanderbilt was a shipping tycoon and railroad baron who, at his death in 1877, was one of the richest men in the world: His estate was worth $100 million, the equivalent of some $2 billion today. He gave little to charity, leaving most of his money to son William and the rest to his wife and daughters. Less than 50 years later, one of Vanderbilt's descendants died penniless. By 1947, all ten Vanderbilt mansions on Fifth Avenue in New York had been torn down. And at the first family reunion in 1973, there were no millionaires.
Many wealthy people don't realize the importance of preparing their children both realistically and emotionally to handle an inheritance, says Zeeb, citing studies that bear this out. In one study, Family Office Exchange, which provides professional advising services to families, asked clients what they thought were the biggest risks they faced. The vast majority cited poor planning and investments, market fluctuations and taxes. Less than one in ten named family dynamics as a potential problem. But when Roy Williams and Vic Priesser, researchers and family coaches with The Williams Group, asked families that lost their wealth what they had done wrong, only 3% cited poor investment strategies or the market. Six in ten blamed their losses on a lack of communication and trust within the family and a quarter answered that unprepared heirs led to their downfall.
Zeeb says a lack of knowledge about family history and little or no appreciation either of how the wealth was acquired or what is necessary to maintain it contribute to a lack of preparation for inheritance in many families.